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The finance bill 2023 has done away with the indexation benefit given to debt funds investors if they hold units of such funds for over 36 months. With this, investors will have to pay tax at marginal rate of taxation irrespective of their holding period.
This brings debt funds, gold ETFs, international funds and FoFs in line with other fixed income products like bank FDs.
This is a big blow to the MF industry as the industry leveraged this tax advantage to convince investors to put their money in debt funds instead of bank FDs. With absence of this tax arbitrage, how can you talk about debt funds with your clients?
We spoke to a few industry experts to understand how MFDs c can ontinue to distribute debt funds. Here is what they said.
Jaipur MFD Ashish Modani of SLA Financial Solutions believes that MFDs should continue to educate investors about the true nature of debt funds. He said, “Many investors know about debt funds due to its tax advantage. Hence, it has now become even more imperative to educate investors about the true nature of debt funds. We should introduce the concept of capital appreciation in debt funds to our clients.”
Bharat Phatak of Scripbox feels that MFDs should highlight that debt funds do not have TDS and they can use these schemes to do SWP to generate regular income. “I believe that some of the benefits of debt funds still continue, such as No TDS and tax liability only when you withdraw the funds. With these benefits, I think the SWP for a prolonged period can still give some advantage over FDs and bonds.”
G Pradeepkumar, CEO, Union Mutual Fund recommends MFDs to shift their conversation from taxation to product feature. “While investors can lock in in at a fixed rate in FDs, debt funds offer them dual advantage of accrual plus capital appreciation. MFDs should explain to their clients the concept of interest rate changes and modified duration. For instance, if a MF scheme has a modified duration of 4 years and if interest rates falls by 1%, the portfolio could have an additional 4% gains (1%*4 years) over and above the YTM.”
Manish Mehta, National Head – Sales, Marketing and Digital Business, Kotak Mutual Fund believes that debt funds should be sold on its merits. “MFDs should focus on its advantage of debt funds like accrual plus mark-to-market gains. Also, they should tell their clients that mutual funds are comparatively more liquid than FDs.”
Sandeep Bagla, CEO, Trust Mutual Fund recommends MFDs to position debt funds during falling interest rate scenario. “MFDs should recommend both FDs and debt funds. While FDs can be good during rate hike cycles, debt funds can offer lucrative returns when RBI decreases repo rate. MFDs should be mindful of rate cycle.”
